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Liquidated Damages Were Neither CGL 'Occurrence' Nor 'Property Damage'

Tuesday, September 26, 2017 06:10 am

 

A general contractor, who also acted as construction manager, sustained $40 million in losses thanks to its subcontractor's actions---with no CGL insurance recourse. Despite costly damage done to a project component, there was no occurrence triggering coverage because of the significant control, responsibility, and ownership the contractor had over the project.

In Kvaerner North American Construction, Inc. v. Certain Underwriters at Lloyd's London Subscribing to Policy No. 509/DL486507, 2017 U.S. Dist. Lexis 100705 (N.D. W.Va. June 28, 2017), the project was to construct a $2-billion coal-fired power plant in Maidsville, West Virginia. During performance, the welding subcontractor damaged components of the boiler, costing the general contractor $4.5 million in repairs and delaying the project 74 days. The project owner assessed $36 million in liquidated damages (at $275,000 per day of delay) against general contractor Kvaerner North American Construction, Inc. (Kvaerner) under a provision in the parties' coordination agreement. Kvaerner's challenge was to convince the court that the liquidated damages resulted from a CGL "occurrence" and constituted "property damage" to a third party's property. It couldn't do it.

The boiler damage happened because the sub's work took place in cramped quarters. To access weld lines, it pulled already installed piping out of the way. As a result, thousands of pipes were bent and hundreds of reinforcing "H-bars" were bent or broken.

Kvaerner's primary contention was that, because the sub's "use of excessive force to move the [piping] was neither intended nor expected, it constitutes an accidental 'occurrence' for which coverage is appropriate."

An intentional act can result in an accident, once

The court disagreed that the force exerted was "excessive" or "unexpected." Rather, it was deliberate and sufficient to move the piping out of the way so that the sub could reach the weld lines. As a result, it was not an "occurrence."

The CGL policy at issue here defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The policy promised to pay damages owed "because of 'property damage' to which this insurance applies" where that damage was caused by an "occurrence" and resulted in a "[l]oss of use of tangible property that is not physically injured."

More specifically, in New York, an occurrence is a "fortuitous event" and "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party." N.Y. Insurance Law 1101(a)(2) (McKinney 2017). And fortuitous events do not include losses that the insured "knows of, planned, intended, or is aware are substantially certain to occur."40 Gardenville, LLC v. Travelers Property Cas. of America, 387 F.Supp.2d 211 (W.D.N.Y. 2005).

Based on the above, the court ruled that the boiler damage was not accidental. Kvaerner could have argued (but did not) that permanently bending the piping and breaking the H-bars was not the sub's intent and was therefore an accident. Notably, the court in Consolidated Edison Co. of New York, Inc. v. Allstate Ins. Co., 98 N.Y.2d 208, 774 N.E.2d 687, 692, 746 N.Y.S.2d 622, (N.Y. 2002) found that there "can be accidental results of intentional acts, thus, the term 'accident' [i.e., 'occurrence'] might apply even where the resulting damage was unintended, even though the acts that caused the damage were, in fact, intentional."

The magnitude of the damage was within the contractor's control

Regardless, the pipe damage was not "to a substantial extent beyond the control" of the general contractor---and that was key.

Kvaerner might also have reasonably argued that the first time the sub bent [...]

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